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Shortage of Houses Builds on an Irish Problem

Last year saw a marked pick-up in residential property prices, which increased by 12.3%, compared to 1.4% in 2013. Dublin led the way, with prices there up 20%, writes Oliver Mangan Chief Economist at AIB.

It was also noticeable, though, that, as the year progressed, prices outside of Dublin rose strongly as well, jumping by over 10% between May and December.

The opening months of this year have seen a moderation in the upward pressure on prices. Indeed, prices decreased in both January and February, marking the first time since early 2013 that prices fell for consecutive months. The year-on-year growth rate, though, remained high at almost 15% in February.

The fall probably largely reflects temporary factors that should abate, such as seasonal issues and uncertainty around the Central Bank’s rules on mortgage lending.

Indeed, data from the property website Daft.ie show that asking prices rose strongly in the first quarter of 2015, most notably outside Dublin.

The key driver of prices remains supply and demand fundamentals. On the supply side, housebuilding data indicate that there was a pick-up in activity levels last year, albeit from a very low base.

Housing completions totalled 11,000 units in 2014, versus 8,300 in 2013. This represents an increase of 33% and was the best year since 2011.

However, the current level of output is still nowhere near sufficient to meet housing demand. We estimate that potential housing demand is around 25,000 units per annum.

Indeed, housing completions hardly ever dropped below 20,000 per annum in recent decades until the last few years.

Worryingly, though, despite the elimination of most of the overhang of unsold properties in many parts of the country, indicators of future housebuilding activity remain at depressed levels.

Of particular worry is the sharp drop in the housing construction PMI in the opening three months of 2015.

Meanwhile, new housing registrations, a good proxy of developer activity, are running at less than 3,000 per annum. Housing commencements did pick up at the start of last year ahead of the introduction of new building regulations. However, they have lost momentum since then, running at around a 4,000 annual rate in the second half of 2014.

This continued shortfall in housing supply is reflected in the declining levels of housing stock available to rent or buy. Daft.ie data show that the number of residential units for sale was down by 20% at the end of 2014 compared to a year earlier, while rental stock was some 40% lower.

Not surprisingly, this scarcity in stock continues to exert upward pressure on rents, which rose by 8.5% year-on-year in the first quarter of 2015 and are now less than 5% off their previous peak.

The outlook for the Irish housing market continues to be framed in the context of the ongoing mismatch between supply and demand.

While price pressures have eased somewhat in recent months, the shortfall between supply and demand points to further upward pressure on prices and rents. The strengthening labour market and improving domestic economy will only add to this trend.

An additional factor to bear in mind is the new Central Bank mortgage regulations in relation to limiting the loan-to-value and loan-to-income ratios. The new rules, though, were modified compared to the initial proposals. Thus, we do not expect them to have a major lasting impact on the housing market.

However, the market will require close monitoring. In particular, it is important that factors such as new planning regulations do not act as a drag on the much needed increase in housing supply.

We are concerned, in particular, at the continuing very depressed levels of leading indicators of building activity, such as housing registrations and commencements. This suggests that it could be a number of years before supply rises to the levels required to bring the market into balance.

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